Mexico tax benefits, for companies that change headquarters to the northern border

Experts point out that it must be guaranteed that the investments that arrive in the region are new.

The proposal to reduce the Income Tax (ISR) to 20% and the Value Added Tax (VAT) to 8% in the northern border of Mexico, could cause companies to change their headquarters to this region to pay a lower charge and, therefore, the resources that the states receive through the General Branch 28 Participations would decrease, indicated experts in fiscal policy.

“If you have a company that operates in Monterrey, what could happen is that you can decide to open a matrix in Nuevo Laredo or Reynosa to make your purchases there and pay less taxes. The majority will choose to bring their merchandise from where the tax is cheaper, “said Héctor Villarreal, general director of the Center for Economic and Budgetary Research (CIEP).

He mentioned that products such as software that can be downloaded from any computer or any purchase made in electronic commerce, entrepreneurs will seek to buy them where they pay less VAT, so the federal government should clarify how it will control this type of situation.

“It would be complicating the tax administration unnecessarily. Around the corner we see many problems of collection and the truth is that we have many questions about the benefits, we believe that they will be smaller than the government believes, “he said.

José Luis de la Cruz, general director of the Institute for Industrial Development and Economic Growth (Idic), added that the government of Andrés Manuel López Obrador (AMLO) must guarantee that the investments that reach the border area are new and that they are arriving in function of only paying lower taxes and that this affects investments in other states.

“The most desirable thing is that the companies that make new investments are those that benefit from these fiscal measures, especially if they are generating employment, but do not cannibalize in other regions; that is, that it is not just the substitution of an investment to transfer the benefit elsewhere, “he said.

Enrique Cárdenas, an academic at the Universidad Iberoamericana Puebla, recalled that before the financial reform of 2014, there were companies that produced on the border, but sold outside the area, thereby playing with VAT transfers.

“This reform was on the right path to avoid distortions in the tax administration, it is possible that with the measures proposed by López Obrador, some companies decide to move their headquarters to the border area and this type of distortion occurs,” he said.

In his opinion, the AMLO government is making a better effort in the south-southeast of the country with Central America, since investments and greater productivity are required in the area, which could compensate for what is missing in the north.

One of the commitments of López Obrador is that from January 1, 2019 the free zone will be created in the 3,180 kilometers of border with the United States (with the benefits in VAT and ISR); In addition, the prices of energy will be homologated with the southern states of the American Union and will increase to twice the minimum wage

Effect on Bouquet 28

The specialists also agreed that the reduction of the ISR and VAT at the border could imply an affectation in the tax collection of the country, which grew five points of the Gross Domestic Product in the administration of Enrique Peña Nieto.

Héctor Villarreal indicated that, according to the calculations of the CIEP, the collection that would stop obtaining due to the reduction of the ISR and VAT at the border would be between 80,000 and 100,000 million pesos, which would also have a negative effect on the resources that they are destined to states and municipalities.

“While it is expected to have a positive impact on consumption in the border area, it is likely that, in the medium term, the benefit will be small and in contrast, you will have a strong impact on collection,” he said.

He commented that the government should be questioned about the reasons for these fiscal stimuli, and why not first improve those areas that suffer from deficiency and insecurity. “The best economic aid is that there are safe zones, that is more important than giving fiscal incentives”.

At the time, the president, Andrés Manuel López Obrador, had reported that, for next year, the participation of states and municipalities would have a budget of 703,000 million pesos, which would mean 13.4% less than those approved for this year. .

The foregoing can be interpreted as a possible reduction in the Participable Federal Revenue (RFP) as an effect of the decreases in ISR and VAT at the border.

The RFP is the set of resources that the Federation receives for federal taxes, mining rights and a portion of oil revenues.

From this stock of resources come the main funds of shares that are transferred to states and municipalities.

The director of Idic explained that the fiscal architecture of the Federation is based on the fact that a percentage of the total collection obtained by the government goes to the coffers of the states.

“Depending on the income you have, they are distributed to all the states and if you do not have something that compensates for that shortfall that you previously obtained by charging 16% VAT, the state revenues will be affected,” he stressed.

He explained that it will also depend on the strategies implemented by the federal and state governments to increase the formality of the country so that more people pay taxes.

“Although the measure of lowering taxes could increase competitiveness in the border area and attract greater investment and consumption, it would leave a significant gap in public finances, pressured by socio-demographic changes that have implications for the budget, especially with increases in spending on pensions and health, “according to a CIEP study.

To avoid these losses, especially in the case of ISR, it is necessary to establish regulations and laws that prevent income mobility, the document clarifies.